During the course of proceedings before transfer pricing officer (“TPO”), it was held that Maruti Suzuki India Limited (“the taxpayer”) has incurred the excessive advertisement, marketing and promotion (“AMP”) cost in connection with a “benefit” and “services provided” to the associated enterprise (“AE”) under a mutual agreement which was not in writing but such arrangements were "proved from the conduct of the taxpayer". Thereafter, the Delhi High Court (“HC”), while concluding the writ petition filed by the taxpayer (against the show-cause notice issued in respect of proposed adjustment on account of excessive AMP expend) held that the action of the TPO was based on no evidences and the procedure followed by him was faulty. Accordingly, the HC directed the TPO to re-determine the appropriate AMP expenses in respect of international transaction entered into by taxpayer with its AE. Further, the Hon’ble Supreme Court, while adjudicating the SLP made by the taxpayer in this regard, has asked the TPO to proceed with the matter in accordance with law “uninfluenced by the observations/ directions” given by the judgment of the HC.

The TPO, subsequently passed its final order which was predominantly guided by the ruling of Special ITAT Bench in case of LG Electronics and concluded that the taxpayer that the promotion of the co-branding of ‘Maruti-Suzuki’ had resulted in promotion of the trade mark of the AE (i.e. Suzuki Motors Corporation, Japan) and confirmed the TP adjustment made on account of excessive AMP spend by taxpayer. The AO confirmed the findings of the TPO and the ITAT subsequently, referred back the matter for determination of AMP spends in the light of Mumbai HC ruling in case of Sony Ericsson Mobile India Private Limited (“Sony Ericsson”). The taxpayer thereafter filed an appeal before Delhi HC framing questions of law.

Findings of the Delhi HC

• Delhi HC distinguished the Sony Ericsson HC ruling with that of the taxpayer while observing that the aforesaid ruling was delivered in context of taxpayers who were distributors of products manufactured by foreign AE unlike in the instant case where the taxpayer is a manufacture. • As regard to the use of Bright Line Test (“BLT”), the Delhi HC referred the case of Sony Ericsson and held that the HC in case of Sony Ericsson expressly interdicted the use of the BLT both as forming the base and determining if there is an international transaction and secondly for the purpose of determining the arm’s length price. Once the BLT is interdicted, there exists no other basis for existence of any international transaction on account of AMP expenses. Hence, the Delhi HC set aside the findings of Mumbai HC in case of Sony Ericsson in relation to the existence of any international transaction.• Delhi HC further observed that it does not see this as a machinery provision particularly in light of the fact that the BLT has been expressly interdicted by the HC in case of Sony Ericsson. It was also held that an AMP adjustment, to which none of the substantive or procedural provisions of Chapter X of the Income-tax Act, 1961 (“the Act”) apply, cannot be held to be permitted by Chapter X of the Act. In other words, with neither the substantive nor the machinery provisions of Chapter X of the Act, being applicable to an AMP adjustment, the inevitable conclusion is that Chapter X of the Act, as a whole, does not permit such an adjustment. Accordingly, there exist no international transaction on account of excessive AMP spend in case of the taxpayer.• While adjudicating in relation the incidental benefit to AE, the Delhi HC made reference of OECD TP Guidelines which emphasized that there should not be any automatic inference about an AE receiving an entity group service only because it gets an incidental benefit for being part of a larger concern and not to any specific activity performed. Even Para 133 and Para 134 of the Sony Ericsson judgment makes it clear that AMP adjustment cannot be made in respect of a full-risk manufacturer.

Our Comments

According to Nangia & Co., this HC ruling is a welcome ruling for the multi-national corporates which unclutters the issues centering on the adjustment made by tax authorities in relation to the excessive AMP spend by the Indian subsidiary of an overseas group entity and thereby promoting the intangibles (like brand, trademarks etc.) in India which are owned by overseas group entity. This ruling is in one step ahead of Mumbai HC Ruling in the case of Sony Ericsson in terms of not considering the AMP expenses as an ‘international transaction’ and making a clear distinction between the AMP spend of distributor with that of the manufacture, Nangia added. Having said that, the Delhi HC ruling may raise the subjective litigation revolving around AMP spend which may eventually only get settled by the higher courts.